On Our Radar

On Our Radar

Tips for Millennials Looking to Secure a Mortgage

Homes along Clearview Drive that are priced between $594,000 and $899,000, according to real estate database Zillow, are seen in Los Gatos, California September 6, 2012. For decades, the government-backed programs that currently support Santa Clara's ...
housing market aimed to help the country's blue collar and middle-class workers achieve the dream of home ownership. But five years after the collapse of a housing bubble, they now underpin almost every new mortgage taken out in the country, including those for four-bedroom houses in Silicon Valley that go for $600,000. The pervasiveness of the government in the nation's housing finance system - even in wealthy areas - is a sign of how dysfunctional the mortgage industry remains. Picture taken September 6. To match Special Report FANFRED/LENDING REUTERS/Norbert von der Groeben (UNITED STATES - Tags: BUSINESS POLITICS REAL ESTATE SOCIETY) - RTR37X0B
(Reuters)

Buying a home is the most expensive purchase most people will make in their lifetime. And for millennials saddled with record student loan debt and underemployment in a tight lending environment, the prospect of becoming a homeowner may seem unobtainable.

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But that’s not necessarily the case.

“Millennials should think about [homeownership] now because they should educate themselves on the process and understand what’s required in the approval process,” says Arlene Allert Maloney, senior vice president at Wells Fargo Home Mortgage.

Many private lenders are requiring hefty down payments, which can be hard for young adults to scrape together. However, Malcolm Hollensteiner, director of Retail Lending Products & Services at TD Bank, says there are other lending options.

“A lot of millennials, because of student loan debt, are not able to save as much in a down payment and closing costs as previous generations have been able to,” says Hollensteiner. “There are programs that are attractive to millennials because of the down payment options that they provide.”

To make sure buying a home makes financial sense, experts say millennials need to know how long they plan to stay in the area to make sure they’ll be able to recoup brokerage fees and closing costs—which experts say is around about five to seven years.

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“There are rules of thumb that have been used forever that give you some guidance on how long you should be in the house, but they tend to be insensitive to current conditions and where you’re planning on buying. These change that equation dramatically. He adds knowing the home price changes in an area also helps determine the break-even point.

- Stan Humphries, Zillow chief economis

“There are rules of thumb that have been used forever that give you some guidance on how long you should be in the house, but they tend to be insensitive to current conditions and where you’re planning on buying,” says Stan Humphries, Zillow chief economist. “These change that equation dramatically.” He adds knowing the home price changes in an area also helps determine the break-even point.

For millennials looking to buy a home now or in a few years, knowing the nuances of the

market and their own personal finances can make all the difference in maximizing their mortgage potential.

Know Your Credit Profile

Millennials need to review their credit history, report and score to have a sense of how attractive they are as a borrower. “This could impact how much money you can borrow and what you’ll have to save for that down payment, and your interest rate,” says Maloney.

Most lenders are currently looking for a credit score in the high 700s, which is why it’s imperative buyers know where they stand so they can repair any damage.

Know Your Debt

A debt-to-income ratio (DTI) is a common term used in the industry that measures borrowers’ monthly obligations versus gross income.

“We’re looking to keep that level at or below 36% — this is a rule of thumb and not an exact science,” says Maloney. “Different products can affect that percentage, like a bigger down payment or a bigger reserve.” Under new regulations as part of the Dodd-Frank Act,

buyers seeking a qualified mortgage will need to have a DTI under 43%.

“If you’re bumping up against the DTI ceiling, you can find a way to pay down that debt, increase your income, or buy a cheaper house,” says Humphries. “At that point, it’s not a down payment issue but a DTI issue and the third option gets utilized the most.”

Experts advise buyers getting financial support from a relative or friend to help with a home purchase weigh the tradeoffs between using these funds to reduce any outstanding debt and putting it toward a down payment.

“Consider the costs of the mortgage versus the cost of the student loan debt — what has a higher interest rate and what impacts your qualifying to a greater degree?” asks Hollensteiner.

Know Your Income

Mortgage underwriters want to know if an individual can sustain homeownership and has the income to support the mortgage payments. “We need to review W2s and tax returns — we want to see a history of income that’s documented and has a likelihood to continue,” says Maloney.

For those with a lower income, experts recommend freeing up available cash flow by eliminating debt to become a more attractive borrower.

Know Your Down Payment

“There’s a misconception that you need 20% down after the issues the housing market went through,” says Maloney. “There are many programs that don’t require a 20% payment but these require mortgage insurance that can increase a payment.”

For buyers who can’t afford a 20% payment, experts suggest looking into assistance programs. “Most states and cities have some type of housing finance agency or another government agency that offers some type of first or second mortgage assistance for eligible residents,” says Hollensteiner.

Federal Housing Administration (FHA) loans, as well as loans offered by some banks, are designed for first-time homebuyers and allow borrowers to put as little as 3.5% down. In general, to qualify for an FHA loan, borrowers can’t breach a mortgage cap, which varies by metro and is roughly about $271,050 for a single family up to $625,000, or a DTI ratio cap of 43%. Since borrowers don’t put 20% down, they have to pay mortgage insurance and have a higher interest rate since they represent more risk.

Know Your Savings

The costs related to homeownership don’t end after the contract is signed, which why owners should maintain some savings after the purchase for unexpected problems.

“A good rule of thumb is a borrower to have a good six months of expenses in the bank,” says Maloney.